Peak "Cheap" Coal Concerns Make CTL Production Plans Unworkable

While the coal industry has been very receptive to meeting the needs of a large coal-to-liquids (CTL) industry in the United States, it seems unclear how they would actually service these new customers with domestic coal supplies at reasonable prices. Indeed, according to the most recent AEO 2009 report, if the CTL industry grew to the size proposed by industry lobbyists, the US would have to actually import coal by the year 2015 at current prices.

To illustrate, let's just say for the sake of argument that the economics didn't matter and that we decide to let the coal-to-liquids industry have their way. That the US government ignores the fact that the break even price to build a CTL plant is above $95/barrel of oil and decides to write a check for $30bln to produce 300,000 barrels a day of CTL by 2015. What would happen to coal supply and coal prices? Does the coal industry have enough spare production capacity on line to produce the additional 58 million short tons of coal annually needed to supply the CTL industry in 2015 without seriously impacting coal prices?

The answer as it stands is no. In fact, using the AEO2009 assessment of coal production, the US would either have to import 30 million short tons of coal in 2015 to meet this increase in demand or raise prices to mine the additional output. Indeed, given that last years spike in coal prices was caused primarily by a 20 million short ton increase in coal exports by US coal producers, the inability of domestic suppliers to cover a 58 million ton increase in coal demand at a reasonable cost should be a serious cause for concern. Especially as it pertains to our electric bills, since coal prices are already high relative to natural gas on a heat rate and transportation adjusted basis (see graph below):

Now the coal industry may respond to this by saying that there is plenty of coal to go around, all we have to do is dig a little bit deeper. Sure extraction technology isn't likely to improve fast enough over the next several years to scale up output significantly, but hey we are the Saudi Arabia of coal. We are open for business and ready for the challenge.

This is what's known as the Exxon Mobil defense. The coal industry will give us their word that they will deliver the additional supplies needed, but since they will actually benefit more from higher coal prices, they are unlikely to try too hard to come up with the goods. They know that if demand rises 5%, which it would by 2015 in order to meet the needs of the CTL industry, prices are likely to go up and up and up and that means so will our electricity bills.

Further, even if they can meet the challenge, what will this mean to our long-term coal supplies? The coal industry has gone to great lengths to comfort the American consumer with the notion that coal is our best and only "cheap" long term energy solution. Unfortunately the numbers they have been using to back up this statement come from a report written when Sweet Home Alabama was rocking the top of the charts (that's 1974 for anyone under fifty).

What the coal industry knows but isn't telling you is that recent work done on our economic coal reserves points to a far shorter time span. In fact, when US coal reserves are adjusted to account for rising coal production rates, financing costs, coal quality, transportation costs, and other environmental and economic considerations the 250 years of reliable "cheap" coal power statistic quickly falls on its face.

In fact, according to a National Academy of Sciences report from 2007, "it is not possible to confirm the often-quoted assertion that there is a sufficient supply of coal for the next 250 years". The report concludes that after factoring in the additional inputs described above, there is probably only sufficient economic reserves of coal left to meet the nation's energy needs for the next 100 years at current consumption rates.

While 100 years of supply might still sound like a long time, if we adjust this number to account for the fact the coal consumption is expected to rise (at a rate of roughly 0.8% a year according to the EIA), the NAS's 100 years of supply at constant consumption levels without CTL production would fall below 75 years of supply at current prices. Of course at higher prices our reserves would be able to provide more coal but the days of "cheap" coal would be long gone. The number of years of coal at current prices would actually fall below 50yrs of supply under the Coal-to-Liquids Coalitions target of 300,000 bpd by 2015 assuming growth rates continued at 5% per year thereafter (see graph below):

A recent assessment of the coal reserves in the Gillette Coalfield by the US Geological Society (USGS) highlights the differences between estimates of coal reserves, mine able coal, and economically recoverable coal. This study is significant as a basis to judge how long our "cheap" coal supplies will last as the Gillette Coalfield, located in the Powder River Basin in Wyoming provides 37% of the nation's coal and is the single most productive coal basin in the country.

In the report, the USGS calculates Gillette's total original coal resource without restrictions to be 210bln short tons. When mining losses, processing losses, and financing costs are taken into account, however, the USGS concludes that the amount of economically recoverable reserves is only 10.1bln short tons of coal or less than 6% of the original resource total at current prices (see graph below):

This reduction in economically recoverable coal in the Powder River Basin can be traced in part to the fact that the easy "cheap" coal has already been mined out of the region. As coal seams in the Powder River Basin tend to slope downward, the task of mining what's left is now becoming an increasingly complex and progressively more expensive (not to mention dangerous) endeavor. While the report clearly points out that production would be higher at higher price points, this additional coal would not be "cheap". By supplying coal to the CTL industry, the coal industry would be crossing the line in terms of peak "cheap" coal in the US. This is especially true when the environmental costs that will come with carbon regulation are factored into the equation.

The Gillette Coalfield report's conclusion that the economically recoverable coal is only 6% of the original source amount should also call into question the wisdom of using an analysis that was written over thirty years ago and assumes a blanket 25% recovery rate for coal reserves to promote our economic coal reserves. Especially as other USGS studies have documented that the economic recovery rates in other parts of the country are far lower than 25% as well.

While you may even argue a 50 plus year supply seems like a long time, it is important to remember that the pressure this would have on coal prices and long-lived coal assets would start to be seen much sooner than this. Perhaps even in the next decade. The US would be forced to deal with this situation by either quickly drawing down its economically recoverable supplies or start importing more and more coal. Either way our energy bills would feel the pinch and the gains from domestically producing CTL would not justify its impact on our countries energy security.

In sum, US coal reserves are unlikely to be large enough to accommodate the additional demand for coal coming from a large domestic CTL industry. Peak coal is not the issue. Peak "cheap" coal is and a 5% increase in coal demand would be more than enough to raise electricity prices and pollution levels in the US far more than the country would benefit from creating a large domestic CTL industry.

Comments

To add a few more points:
- Considerable PRB rail congestion is expected to remain.
- Appalachian coal fields are in decline.
- Peak coal has already occurred in Canada and Europe and these and many other countries are importing US coal at an increasing rate. http://www.eia.doe.gov/cneaf/coal/quarterly/html/t7p01p1.html
- Diesel fuel (needed for extraction and transport) is a large part of the cost of coal and will rise with the price of oil.

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